At Dilendorf Law Firm, we represent foreign individuals, families, funds, and corporations investing in U.S. real estate — structuring acquisitions, holding arrangements, and dispositions to minimize U.S. income tax, estate tax, gift tax, and FIRPTA withholding while complying fully with U.S. reporting requirements.
The U.S. taxes foreign investors on rental income, capital gains from real estate, and U.S.-situs assets at death — often at rates and on a base materially different from what a U.S. investor faces.
The single largest cost most foreign investors will encounter is FIRPTA: a federal withholding regime that requires the buyer to withhold up to 15% of the gross sale price (not the gain) on any sale of U.S. real estate by a foreign seller.
Combined with state withholding — in New York, an additional 10.9% non-resident tax — FIRPTA can tie up roughly 26% of sale proceeds at closing.
FIRPTA cannot be avoided, but withholding can be reduced or eliminated with proper planning before the investment is made, and with the right paperwork at the point of sale.
If you are a foreign investor considering U.S. real estate, contact us at info@dilendorf.com or 212.457.9797 for a confidential consultation.
ATTORNEYS' EXPERIENCE
ATTORNEYS' EXPERIENCE
We assist foreign individuals, families, funds, and corporations with inbound investment into U.S. real estate — structuring, FIRPTA compliance, treaty positioning, and estate planning.
Three distinct U.S. tax regimes can apply to a foreign owner of U.S. real estate. Structuring decisions made before acquisition determine how much exposure each one creates.
Income tax. Rental income and capital gains from U.S. real estate are taxable to a foreign owner. Direct ownership typically requires the foreign owner to file U.S. tax returns (Form 1040-NR) and exposes them to U.S. graduated rates on net effectively connected income.
Estate tax. A non-resident, non-citizen owner of U.S. real estate is subject to U.S. federal estate tax on the value of that real estate at death. The federal estate tax exemption for non-resident aliens is only $60,000 — compared with the $13.99 million (2025) exemption available to U.S. citizens and residents. Above $60,000, the estate tax rate climbs quickly to 40%.
FIRPTA withholding on sale. When the property is sold, the buyer is required to withhold from the gross sale proceeds and remit to the IRS — regardless of the foreign seller’s actual gain, basis, or holding period.
How FIRPTA Works
The Foreign Investment in Real Property Tax Act of 1980 (IRC § 897 and § 1445) was instituted to ensure capital gains taxes are captured from foreign sellers who do not file traditional U.S. tax returns.
The law treats gain from a foreign person’s disposition of a U.S. Real Property Interest (USRPI) as effectively connected income subject to U.S. tax — and makes the buyer the withholding agent, with personal liability if withholding is not done correctly.
Default withholding rate:15% of the amount realized — typically the gross sale price plus any liabilities the buyer assumes (10% for dispositions before February 17, 2016). Note: this is computed on the gross price, not the seller’s gain.
Reduced rate of 10% applies to a sale between $300,001 and $1,000,000 where the buyer intends to use the property as a personal residence.
Exemption from withholding applies where the sale price is $300,000 or less and the buyer intends to use the property as a personal residence.
Buyer penalty risk. Penalties on the buyer (as withholding agent) for non-payment or late payment of FIRPTA withholding are substantial and may include the full withholding amount plus fines. This makes the closing process FIRPTA-sensitive for both sides.
A USRPI includes direct interests in U.S. real estate and shares of a domestic corporation if 50% or more of its asset value is U.S. real estate (a U.S. Real Property Holding Corporation). This second category catches foreign investors who acquired U.S. real estate through a U.S. corporation thinking the corporate wrapper would shield them from FIRPTA — it does not.
Why FIRPTA Withholding Hurts Foreign Sellers
Because FIRPTA withholding is calculated on the gross sale price, foreign sellers routinely overpay at closing relative to their actual U.S. tax liability — sometimes by a factor of two or three.
The overpayment is then tied up with the IRS until the seller files a U.S. tax return for the year of sale and claims a refund, which can take many months.
Practical consequences for foreign sellers include:
Sale proceeds tied up with the IRS until the next tax year
Prevention of timely reinvestment of the sale proceeds
Complications in 1031-Exchange transactions
Complications in satisfying foreign mortgages and financing arrangements from sale proceeds
Impediments to payment of transfer taxes and closing costs at the closing table
State Withholding — The New York 10.9% Layer
FIRPTA is the federal piece. Many states layer their own non-resident withholding on top:
New York withholds 10.9% of the gain on the sale of New York real estate by a non-resident
California, Hawaii, Maryland, and other states have similar non-resident withholding regimes
Combined federal + state withholding on a New York sale can approach 26% of the gross sale price
The state withholding is independent of FIRPTA and must be addressed separately at closing.
Reducing or Eliminating FIRPTA — The Withholding Certificate
The IRS allows foreign sellers (and buyers) to apply for a Withholding Certificate (Form 8288-B) before closing to reduce or eliminate FIRPTA withholding where the seller can demonstrate that the actual U.S. tax liability will be lower than the default 15% withholding. This is the single most important tool for foreign sellers.
The process takes 4 to 8 weeks and must be initiated as early as possible in the sale process. Once filed, the withholding can be held in escrow (rather than remitted to the IRS) pending the certificate decision.
Factors that drive a reduced certificate:
Original purchase price of the property (basis)
Length of ownership (long-term capital gain treatment)
Capital improvements and other basis adjustments
Closing costs
Personal-residence exclusion under IRC § 121, where the foreign seller qualifies
Loss positions, where the property is sold below basis
1031-Exchange treatment, where applicable
Location of the seller’s tax residency and applicable treaty position
Ownership Structures for Foreign Buyers
The single most consequential decision a foreign investor makes is how to hold the property. Each structure trades off income tax efficiency, estate tax protection, FIRPTA exposure, privacy, and ease of administration. Common options:
Direct individual ownership. Simplest but worst for estate tax — full U.S. estate tax exposure above $60,000, plus continuous U.S. filing obligations.
U.S. LLC owned individually. Income-tax efficient (pass-through) but provides no estate tax protection — the IRS looks through the LLC. A common mistake.
Foreign corporation owning U.S. real estate. Removes the asset from the individual’s U.S. estate but creates branch profits tax exposure (additional 30% tax on repatriated earnings, subject to treaty reduction) and ordinary-corporate-rate income tax — usually inefficient for residential or appreciating investment property.
Foreign corporation owning a U.S. LLC. A widely-used structure for commercial/income-producing real estate — combines pass-through U.S. taxation with estate tax protection through the foreign corporate parent.
Irrevocable foreign trust. Removes the asset from the U.S. estate, provides multigenerational wealth-transfer benefits, and can be paired with U.S. or foreign LLCs holding individual properties. Particularly effective for HNW family acquisitions.
Domestic asset protection trust (Wyoming, Nevada, South Dakota) holding the LLC. Layers asset protection on top of estate planning — increasingly the preferred structure for larger acquisitions.
The right answer depends on the investor’s residence country, tax treaty position, investment horizon, family situation, and whether the property is residential, investment, or commercial.
Tax Treaty Positioning
The U.S. has income tax treaties with more than 60 countries that can materially reduce the U.S. tax burden on rental income, dividends, branch profits, and gains — but the benefits are claimed only when properly invoked and documented.
We structure investments to capture treaty benefits where available, including for clients from Germany, the UK, Switzerland, Italy, France, Canada, and other treaty-partner countries.
The § 1031 Like-Kind Exchange
Foreign investors can use § 1031 exchanges to defer U.S. tax on the sale of investment real estate by reinvesting proceeds in like-kind U.S. property.
Properly structured, a 1031 exchange combined with a FIRPTA Withholding Certificate can roll the entire gain into the replacement property with little or no withholding at closing. Reverse 1031 exchanges — where the replacement property is acquired before the relinquished property is sold — add complexity but are workable with the right counsel.
Cross-Border Reporting
Foreign investors and the U.S. entities they create face overlapping reporting obligations:
FBAR (FinCEN 114) for U.S. persons (including U.S. LLCs in some cases) with signature authority over foreign financial accounts
Form 8938 FATCA reporting of specified foreign financial assets
Form 5472 — required for U.S. LLCs owned by foreign persons with reportable transactions
Form W-8BEN — foreign owner’s certification of foreign status to U.S. payors
Missing any of these filings creates independent penalties — often disproportionate to the underlying tax liability.
Why Engage Counsel Before the Acquisition
The structures that minimize U.S. income tax, eliminate estate tax exposure, and reduce FIRPTA at sale must be in place before the property is acquired.
Restructuring after closing is possible but typically requires a taxable transfer that defeats much of the benefit. The cost of correcting a poorly structured U.S. real estate investment usually exceeds the cost of structuring it correctly the first time.
Contact Us
If you are a foreign investor considering U.S. real estate — or selling U.S. real estate you already own — contact us at info@dilendorf.com or 212.457.9797 for a confidential consultation.
We will assess the right ownership structure, treaty position, FIRPTA exposure, and estate planning before you commit funds.
